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Volatility ETFs Jump on Global Growth Concerns

Volatility took the front seat following the rounds of downbeat data across the globe that has escalated fears of a global slowdown. This is particularly true as the Eurozone manufacturing sector activity in March contracted at the fastest pace in nearly six years, per the latest IHS/Markit research data.

German manufacturing activity growth was weakest in six and a half years while France’s private sector also sank. Moreover, the U.S. manufacturing sector Flash Purchasing Managers' Index (PMI) tumbled to its lowest level in nearly two years. Another sign of U.S. economic downturn is the Fed’s surprise move for no rate hike this year.

The aforementioned bleak data confirmed a trend of sharply decelerating global economy, causing inversion of an yield curve. The spread between yields of three-month Treasury bills exceeded those of 10-year notes for the first time since 2007.

As such, the volatility level represented by the CBOE Volatility Index (VIX) spiked 24% on Mar 22, suggesting that the market worries have started to set in. This fear gauge tends to outperform when markets are declining or fear-levels pertaining to the future are high.

Investors could definitely benefit from this trend. While they can’t directly buy this index, there are several ETF/ETN options available in the market that can provide some exposure to volatility. These products have proven to be short-time winners in turbulent times. Below, we have highlighted short-term volatility products that will steadily move higher as long as global downslide concerns linger (read: ETFs vs. ETNs: Why You Need to Know the Difference):

Simple Volatility ETFs

iPath Series B S&P 500 VIX Short-Term Futures ETN VXXB

This ETN is a popular option, providing exposure to volatility that sees a truly impressive average volume of about 8.3 million shares per day. The note has amassed $806.5 million in AUM and charges 89 bps in fees each year. The note is linked to the performance of the S&P 500 VIX Short-Term Futures Index Total Return, which renders access to equity market volatility through CBOE Volatility Index futures. The index offers exposure to a daily rolling long position in the first and second-month VIX futures contracts and reflects market participants’ views of the VIX index’s future direction at the time of expiration of the VIX futures contracts comprising the index. The product rose 11.5% on Mar 22 (read: Top and Flop ETFs at Half-Way Q1).

ProShares VIX Short-Term Futures ETF VIXY

It seeks to profit from increases in the expected volatility of the S&P 500 as measured by the prices of VIX futures contracts. The ETF focuses on the S&P 500 VIX Short-Term Futures Index, measuring the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration. It has amassed $228.2 million in AUM and charges 85 bps in fees per year. The fund trades in average daily volume of 2.1 million shares and gained 11.7% on Mar 22.

VelocityShares Daily Long VIX Short-Term ETN VIIX

This ETN is unpopular and illiquid with AUM of $45.9 million and average daily volume of 135,000 shares. It seeks to deliver the daily performance of the S&P 500 VIX Short-Term Futures Index, charging 89 bps in annual fees. VIIX was up 11.7% on the last trading day (read: Best & Worst Zones of 2018 and Their ETFs).

Leveraged Volatility ETFs

Investors seeking huge gains in a very short time frame could consider leveraged volatility ETFs. Currently, there are two options available under this category:

ProShares Ultra VIX Short-Term Futures ETF UVXY

This fund offers exposure to one and one-half times (1.5x) the daily performance of the S&P 500 VIX Short-Term Futures Index. It has accumulated $708.3 million and average daily volume of 9.8 million shares. UVXY charges 95 bps in annual fees and rallied 17.4% in the last trading session.

VelocityShares Daily 2x VIX Short-Term ETN TVIX

This note offers two times exposure to the S&P 500 VIX Short-Term Futures Index. TVIX is popular with average daily volume of around 15.7 million shares and AUM of about $972.3 million. Expense ratio came in much higher at 1.65%.

Bottom Line

Investors should note that these products are suitable only for short-term traders. This is because most of the time, the VIX futures market trades in a condition known as contango, a situation wherein the near-term futures are cheaper than the long-term futures contracts. Since volatility ETFs and ETNs like VXX must roll from month to month in order to avoid delivery, the situation of contango can eat away returns over the long periods (see: all the Volatility ETFs here).

Though volatility of volatility products is pretty high, this seems a good time to stuff these products in your portfolio given that the global slowdown woes will persist to threaten the stock market at least in the near term.

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